Meet the Unstoppable Vanguard ETF Beating the S&P 500, the Nasdaq-100, and the Dow Jones in 2026

The ongoing geopolitical tensions in the Middle East have sparked wild swings in oil prices, with significant consequences for the global economy. It's led to market volatility over the last few months; however, the S&P 500 (SNPINDEX: ^GSPC), the Dow Jones Industrial Average (DJINDICES: ^DJI), and the Nasdaq-100 still managed year-to-date gains of between 1.6% and 7.1%.

The Russell 2000, which tracks the performance of approximately 2,000 of the smallest companies listed on U.S. stock exchanges, is doing even better in 2026 with a return of 11.1% so far. Many of these companies conduct the majority of their business inside America, so they are more insulated from global geopolitical risks than the multinational giants that dominate other indexes like the S&P 500.

The Vanguard Russell 2000 ETF (NASDAQ: VTWO) is an exchange-traded fund (ETF) that tracks the performance of the Russell 2000 by holding the same stocks. Here's why it can continue beating the major U.S. indexes during 2026.

Image source: Getty Images.

Small caps are benefiting from a number of tailwinds

Companies in the Russell 2000 span every economic sector, so it's highly diversified. Plus, while the technology sector alone makes up more than one-third of the value of the S&P 500 and almost 60% of the Nasdaq-100, the Russell is far more balanced.

Its largest sector is healthcare, with a portfolio weighting of 18.7%, followed by industrials at 18.1% and financials at 17.2%. Moreover, the top 10 holdings in the Russell represent just 5.5% of the value of its portfolio, so its performance isn't dictated by a mere handful of stocks. Generally speaking, a more evenly distributed index can produce steadier returns with lower volatility than one that is highly concentrated.

Data source: Vanguard. Portfolio weightings are accurate as of March 31, 2026, and are subject to change.

Most of these companies operate exclusively in the U.S., so not only are they somewhat insulated from the increasingly unstable geopolitical environment, but they also benefit from highly favorable government policies. The Trump administration continues to cut regulations to reduce the cost of doing business, and it also imposed a series of tariffs on imported goods to make domestic companies more competitive with their global counterparts.

These tailwinds are helping companies like Bloom Energy, which manufactures its clean energy solutions in the U.S. The company is seeing explosive demand from data center operators who need alternative sources of electricity to power their artificial intelligence (AI) infrastructure, which is why its stock has rocketed higher by 1,100% over the past year alone.

Shares of both Coeur Mining and Hecla Mining have tripled over the last 12 months. They operate in North America, where they explore for precious metals, so they have benefited from the recent surge in gold and silver prices.

Fabrinet's stock has also tripled over the last 12 months amid soaring demand for its high-speed networking and connectivity components for AI data centers. Its customers include trillion-dollar tech powerhouses like Nvidia and Amazon.

More upside might be ahead for the Vanguard ETF

Investors who bought the Vanguard Russell 2000 ETF 10 years ago would be sitting on a solid return of 143%. However, they would have done much better had they invested in the S&P 500, the Dow, or the Nasdaq-100 instead. Therefore, the Russell's outperformance in 2026 appears to be an outlier, but that doesn't mean it can't continue.

Data by YCharts.

The Russell has no exposure to tech giants like Nvidia, which leads the market in terms of revenue and earnings growth, and that's why it usually underperforms the other indexes. But those very companies conduct a significant amount of their business overseas, so the increasingly uncertain global environment will probably remain a headwind for them in the remainder of 2026.

While the U.S. is technically energy independent, regions like Europe and Asia still rely on the Middle East to meet their oil needs, so their consumers and businesses will be dealing with higher gas and logistics costs for as long as the war in Iran continues. The knock-on effects could result in less spending and slower economic growth, which will impact every company drawing revenue from these regions.

Therefore, I think this is the perfect environment for the Russell to continue outshining its much larger peers.

Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Bloom Energy, Kratos Defense & Security Solutions, Nextpower, Nvidia, and Sterling Infrastructure. The Motley Fool has a disclosure policy.